The Crash, The War, And Who Wins?

It's All Connected

Jun 15, 2022

OK, more Big Picture Stuff. The title is taken from a Jacob Dreizin video that I’ve embedded below. The idea is that the economic crisis of the West—very much including America—was bound to happen. The momentum has been building for decades, and every opportunity to stop before the cliff has been rejected by the Establishment Oligarchy. Launching a war against Russia was a choice—a very bad choice—and accelerated the onset of the West’s crisis. A perfect storm, but not of coincidences.

One way to start might be to simply offer a list of links, all predicting economic gloom and doom. On the other hand, here’s the introduction to a rant by Karl Denninger that sets the context. Denninger is riffing off the projected next interest rate hike by the Fed. The key is KD’s assertion that this is not some recent development:

Unfortunately 50 bips will do nothing to cool inflation; to do that short-term rates must be higher than the inflation rate so that the real cost of borrowing is positive. That would mean putting about 700 bips on the FFR right here and now -- which we know won't happen.
Then again this has been the problem for the last 30ish years. The slope of the interest rate curve has gone from the upper left to the lower right and thus serial refinancing at the corporate and government level, say much less at the personal level, has looked "free." That's the sneaky part of inflation which I explained back when I wrote Leverage with a nice graph. When you run a deliberate inflationary policy over decades the first years look like a free lunch because the apparent "wealth" initially goes up faster than the debt service (which is on a smaller base) and thus produces a "belly" (an area of expansion of the space between the two lines of available spending power and debt service.)
This is a chimera and to intentionally run such a policy as a business or government is fraud because all exponential expansions eventually go vertical, and the debt service will eventually cross available funds at which point you're screwed since you cannot spend 110% of what you have -- ever -- no matter what you do.
It's happening now.

He goes on to predict a halving of real estate prices. That’s something that Dreizin gets into as well—in the context of the war on Russia!

Now, in what follows, note that Dreizin will appear to disagree with KD regarding inflation v. deflation. However, a closer reading suggests that both—including KD—think the Fed will try for a “soft landing”. But even Dreizin admits he doesn’t see how they can pull that off. Both see the West as having gone over a cliff due to the decades long US policy of dollar imperialism fueled by the petrodollar inflation racket and the outsourcing of our real economy. What neither mention is that the sanctions have triggered a global search for a safer haven than the dollar, and that puts the US in an economic pickle.

So, here we go with Dreizin. The meat of his analysis runs from about 5:00 to about 12:00. Here are some of the high points of his analysis. As you’ll see, he’s basically saying that the West is between a rock and a hard place:

The war and the economy--it's all connected.
The US and its hegemonic bloc has, at the worst possible time, initiated a sanctions war, an economic war, on what they perceive to be their chief geopolitical rival: Russia.
It's going very poorly. Their timing was horrendous. Everything that was gonna happen economically was gonna happen anyway, but they have massively accelerated it through this energy inflation. They, the hegemonic bloc, have basically pushed themselves off a cliff. The economic Ponzi scheme of dollar inflation that KD talks about is now coming down just at the moment that Russia is making its big geopolitical move to partially reverse the collapse of the USSR. Russia is on the way up, and the West chose absolutely the wrong timing, the wrong strategy, and it's turning out to be a complete disaster.
What happened Friday through Monday was a really big shock in the US. Treasury prices are cratering, yields are skyrocketing and it's really hit the mortgage market hard. The result is that the first time homebuyer market in the US has been almost completely shut down.
This can't last. They're talking about hiking rates--that will bring everything down very, very quickly. They will have to back out of that sooner rather than later rather than send the economy into a deflation of asset prices—houses and stocks. It will be on the order of something approaching the Great Depression. Worse than 2008. They're gonna have to try to deal with inflation rather than trigger deflation. But they can't do that either, because we're in a very highly inflationary environment.
This is just the wrong time to be picking an economic war with Russia. They were already in a corner, and now they've managed to back themselves even more deeply into that corner. It's a total disaster.
It will affect all of us, unless you're sitting on tons of gold. But it also really impacts what Russia is doing. If the West goes into really hard deflation, at some point energy prices will come down, which will obviously affect Russia. On the other hand, if the West opts for runaway inflation instead of collapsing asset prices, then Russia will be making money hand over fist and will end up on top of everything. It's all connected.

Now, I’ll finish with a twitter thread on the same topic. I offer this as a sample of the type of existential economic angst that’s visible almost everywhere:

“‘Inflation is temporary,’ they said, and now they say there is no risk of a recession in the G7 countries. Everything is recorded, they will not be able to get out. As a result, the strongest inflation in 40 years and ahead of the strongest crisis in 100 years!” — Spydell 🇷🇺
“The inadequacy of forecasts of leading international agencies and investment banks is striking. They are in principle unable to assess the future, all their forecasts were wrong, they could never predict the crisis. In general, never, not a single crisis was worked out by them.”
“Their forecasts are at the level of ‘garbage’, misleading, and distorting reality. When all indications were that the system had gone rogue at the beginning of 2021 and inflation was imminent, they persistently and consistently convinced everyone that this was temporary.”
“It’s like putting out a fire when everything's burned down. Inflation got out of control, causing fundamental damage to the debt markets, which will drag everything with them. There is no talk of GDP growth in US and Europe, the question is already on the scale of the collapse.”
“June 2022 is when everything collapses. There is no shelter, a large-scale collapse in all asset classes: the US stock market lost almost 5.2 trillion in capitalization in 3 days (13 trillion from December), the global stock market over 8.7 trillion.”
“The worst thing is that the debt market collapsed. Spit on crypto and even the stock market. It is the debt market that is the trigger and catalyst for the disaster. This market has gone bust. Will Powell again set up another psychotherapy session just to do nothing again?”
“Since 1973, inflation in the US went into overdrive. The growth of the market from 2009-2021 was based on fiscal and monetary doping. And now inflation has hit 40-year highs and the market has collapsed by 22%. The US market does NOT (!) grow when inflation rises!”
“The volume of trading in yuan in the currency section of Moscow Exchange is more than 15x higher than the volume of trading before the Special Military Operation and there are no signs of slowing down. In 2023 the yuan will be traded more actively than the dollar! That's it.”
“The Fed has created an irresolvable contradiction that will lead to a total collapse of the entire modern architecture of the world order, where the main platform for life support will break out — trust in fiat currencies and the stability of the debt market.”
“The crisis is much larger and deeper than the Great Depression, the collapse of assets to zero. In the end, there will be a choice between a bad and disastrous option, but I am inclined that they will choose the second because the first option comes with political costs.”